LUVFINANCE, Inc. is estimating its WACC. It is operating at its optimal capital structure. Its outstanding bonds have a 12 percent coupon, paid semiannually, a current maturity of 17 years, and sell for $1,162. It has 100,000 bonds outstanding. The firm can issue new 20-year maturity semiannual bonds at par but will incur flotation costs of $50 per bond (Hir the coupon rate on the new bonds = the YTM on existing bonds). The firr could sell, at par, $100 preferred stock that pays a 12 percent annual dividend that is currently selling for $120. The firm currently has 1,000,00

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Chapter6: Fixed-income Securities: Characteristics And Valuation
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LUVFINANCE, Inc. is estimating its WACC. It is operating at its optimal
capital structure. Its outstanding bonds have a 12 percent coupon, paid
semiannually, a current maturity of 17 years, and sell for $1,162. It has
100,000 bonds outstanding. The firm can issue new 20-year maturity
semiannual bonds at par but will incur flotation costs of $50 per bond (Hint:
the coupon rate on the new bonds = the YTM on existing bonds). The firm
%3D
could sell, at par, $100 preferred stock that pays a 12 percent annual
dividend that is currently selling for $120. The firm currently has 1,000,000
shares of preferred stock outstanding. Rollins' beta is 0.89, the risk-free
rate is 3.54 percent, and the market risk premium is 6 percent. The
common stock currently sells for $100 a share and there are 5,000,000
shares outstanding. The firm's marginal tax rate is 40 percent. What is the
WACC?
Transcribed Image Text:LUVFINANCE, Inc. is estimating its WACC. It is operating at its optimal capital structure. Its outstanding bonds have a 12 percent coupon, paid semiannually, a current maturity of 17 years, and sell for $1,162. It has 100,000 bonds outstanding. The firm can issue new 20-year maturity semiannual bonds at par but will incur flotation costs of $50 per bond (Hint: the coupon rate on the new bonds = the YTM on existing bonds). The firm %3D could sell, at par, $100 preferred stock that pays a 12 percent annual dividend that is currently selling for $120. The firm currently has 1,000,000 shares of preferred stock outstanding. Rollins' beta is 0.89, the risk-free rate is 3.54 percent, and the market risk premium is 6 percent. The common stock currently sells for $100 a share and there are 5,000,000 shares outstanding. The firm's marginal tax rate is 40 percent. What is the WACC?
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